S&P downgrades Arcapita and Investcorp

The Middle Eastern banks have suffered ratings cuts due to concerns over high leverage, a strain on liquidity and an expected fall in the value of the firms' private equity and real estate investments.

Standard & Poor’s Rating Services has lowered the credit ratings of Bahrain’s Arcapita and Investcorp Banks. Both banks had an earlier rating of BBB/A-2 but have been downgraded to BB+/B.

The two-notch downgrade of Investcorp reflects S&P’s view of the increasingly difficult operating environment for the bank’s principal business lines of hedge fund investing, private equity and real estate, Nick Hill, a credit analyst at S&P, said.

“In our view, global deleveraging, falling equity and real estate prices, and tight credit are combining to lower the value of Investcorp's proprietary investments, strain funding and liquidity, and reduce capitalisation,” Hill added. 

Investcorp called S&P's move “disappointing” and “unjustified” and said that it does not affect the firm's business or its ability to access capital from its clients and shareholders. 

In the case of Arcapita, the downgrade is representative of the firm's weak liquidity profile in an increasingly difficult operating environment, Mohamed Damak, a credit analyst at S&P said.

S&P added that the value of Arcapita’s investments, particularly in private equity and real estate, could decline given current market conditions. The firm’s rating also reflects its high leverage and narrow business diversification.

The report noted that if the firm’s liquidity profile and leverage did not improve significantly in the near future, its ratings could be lowered further.

“Although we are disappointed at the result of S&P’s review, we believe that the current uncertainty surrounding the private equity sector globally has been a dominant factor in their decision,” said Atif A. Abdulmalik, chief executive officer of Arcapita.

“Our leverage ratio is modest at approximately 2.2, and our capital adequacy is at 17.5 percent, almost 50 percent more than the minimum required by the Central Bank of Bahrain,” he added.

Arcapita invests in logistics, retail, consumer products, energy, specialised manufacturing and healthcare. Since 1997, the firm has completed 75 deals with a transaction value of more than $29 billion.

Investcorp has more than $17 billion in invested assets under management across private equity, hedge funds, real estate, technology and Gulf growth capital. In December 2008, the firm reduced its headcount by 90 in a bid to cut costs.